The Income-Tax department is scrutinising companies that have set up subsidiaries or units in special economic zones (SEZ) after it foundthat many of these firms were using their SEZ operations as a vehicle for claiming undue tax benefits.

The modus operandi adopted by a number of companies is to manipulate the accounts to transfer the profits generated in their regular business to the subsidiaries set up in these zones. SEZ units are exempted from taxation under Section 10 A and Section 10 AA of the Income-Tax Act.

The benefits from such unscrupulous operations are two-fold: First, a company can claim exemption for the income for which tax has to be paid in normal course. Second, it can show huge turnover and profit in the balance sheet which is attractive to the stock market and yet stay out of the tax net.

The investigation wing of the Mumbai income-tax department has come across this novel modus operandi of tax evasion after it raided three companies having subsidiaries in SEZs. The department found that the main purpose of setting up companies in SEZ is to claim tax exemptions accorded to SEZ units. The companies manipulated the accounts to create a picture of huge transactions and profits from the SEZ subsidiaries while, in fact, these units by and large were just dummy units without any serious operation.

According to the I-T officials who have access to this information, the tax evaded by transferring profits to companies set up in SEZs is huge. The officials suspect that several big corporates too could be involved in evasion of taxes in this manner.

The renewed focus of I-T officials on SEZ units comes in the wake of an expected shortfall in direct tax collection, projected to be Rs 3.95 lakh crore. The department has the huge task of collecting Rs 1,00,000 crore in the remaining two months of the current fiscal. This has forced the I-T department to ensure all forms of leakage in tax collection is plugged.